Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO senior economist Robert Kavcic detailed the potential damage to the housing market after the Bank of Canada’s rate hike,
“Another Swing of the Housing Hammer. The Bank of Canada’s latest rate hike is going to bite into the mortgage market and discretionary spending. Here are some numbers:
“-Roughly $260 bln of variable rate mortgages were taken out around the 1.5% lows in the year through February 2022, or almost 20% of the overall mortgage market. After today, those rates are closer to 5%. Some will be getting triggered into higher payments or, if not, are now looking at dramatically longer effective amortization periods (to be dealt with later upon renewal). About $130 bln of fixed rate mortgages were taken out over a 12-month period about five years ago, at rates in the low-3% range. Those mortgages will be renewing into meaningfully higher payments in the months ahead. -Roughly $160 bln of secured personal lending (i.e., HELOCs) was taken out at cycle-low interest rates in the year through February 2022. Interest rates on that lending are now up about 300 bps, and minimum payments have roughly doubled.”
“‘Another swing of the housing hammer’ (BMO)” – (research excerpt) Twitter
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Also from BMO, analyst Jenny Ma detailed the developments in the multi-family REIT sector,
“Q2/22 operating and financial results were solid as all the multifamily REITs under coverage posted positive [net operating income] growth and y/y growth in per unit cash flow. That said, broadly speaking Q2/22 results came in neutral or slightly below expectations. Rental demand has definitively picked up in most markets, putting upward pressure on market rents and setting up for what we believe will be a strong second half of the year … Higher interest rates expected to pressure cash flow. The multifamily REITs have a relatively high exposure to near-term debt maturities (~20-30% of total debt rolling through year-end 2023) with weighted average interest rates below 3% (market is in the high-3%/4% range). Among Canadian multifamily REITs, we view CAR.UN [Canadian Apartment Properties REIT] as in the best position from an interest rate risk perspective with less than 10% of debt maturing through 2023 … "
More research is required, but rising rents and relative safety from rising borrowing costs make CAR.UN an interesting option relative to the rest of the sector.
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Goldman Sachs U.S. equity strategist Cormac Connors believes value stocks will outperform growth, and provides stock picks,
“Current relative valuations within the equity market imply the Value factor will generate strong returns over the medium term. The historically large magnitude of the current valuation gap between the cheapest and most expensive stocks suggests robust medium-term returns for Value. Even after adjusting for expected growth rates, Growth stocks look unusually expensive … risks to the macro environment are skewed in favor of Value. Value has historically outperformed Growth in the wake of two macro events: A peak in inflation and an end to the Fed hiking cycle. Recession risk has also been a focus of investor concern in 2022, and history shows Value stocks outperform around the start of recessions … For investors searching for Value opportunities, we highlight the 25 stocks in our Value factor that Value-oriented mutual funds are most underweight”
Non-financial and energy stocks in the value opportunities list include Pfizer, Moderna, Ford Motor, CVS Health, Micron Technology, Nucor, Cisco Systems, United Airlines Holdings, Dow and Mosaic.
“MS: “25 stocks in our S&P 500 Value factor that Value mutual funds are most underweight”” – (table) Twitter
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Newsletter: “More trouble ahead for dividend investors” – Inside the Market
Diversion: “A Man Had His Foot Safely Amputated 31,000 Years Ago, Scientists Find” – Gizmodo
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Scott Barlow